Why It’s Time for Central Bankers to Say: ‘No More!’

Easy money and central-bank intervention are not the answers to the stumbling global recovery

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Hannelore Foerster / Bloomberg via Getty Images

Mario Draghi, president of the European Central Bank, attends a news conference at the ECB headquarters in Frankfurt on Aug. 2, 2012

In my (too many) years covering the global economy and assorted financial crises, the perpetual hypocrisy exhibited by the world’s private bankers continues to amaze me. Confronted by government attempts to better regulate or in any way curtail their often irresponsible tactics to line their own pockets, bankers claim amid horrified gasps that overbearing bureaucrats are assaulting the West’s cherished free-market principles. But the moment things go a bit wonky, these same bankers are perfectly happy to accept a taxpayer handout or yelp for another slathering of easy money from the Federal Reserve or European Central Bank. Government action seems just fine with the world of Wall Street when it produces easy money for easy profits.

In recent weeks, those calls for central-bank rescues have gotten louder. The moment the recovery in the U.S. seemed to soften, traders and bankers immediately turned their eyes to Ben Bernanke, looking for another stimulating boost from the Federal Reserve. He is even getting pressure to put out from within his own ranks. The president of the Federal Reserve Bank of Boston told the Wall Street Journal that he favors another big bond-buying program (known as quantitative easing) to stimulate the economy. You can practically see the drool running down bankers’ chins at the prospect of another Fed injection of megacash that would fuel another surge in stock prices. Meanwhile, in Europe, investors looked to ECB president “Super” Mario Draghi to step in with another minibailout to keep the monetary union afloat as borrowing costs for Spain and Italy soared. Anticipation is still high that Europe’s central bank will use its power to create euros to buy up bonds that the private sector won’t.

(MORE: Will Ben Bernanke Pull the Trigger on More Bond Buying?)

The time has come, however, for the global financial sector to wean itself off central-bank support. We can’t expect our central banks to buy our way out of the continued problems facing the global economy. In fact, doing so might be causing more harm than good.

Nowhere is that more true than in the U.S. After years of near zero Fed interest rates and massive bouts of quantitative easing, it is hard for me to imagine that a lack of available cash is behind the stumbles of the American economy. The fact is that Fed largesse cannot resolve what really ails America. The cleanup of the nation’s housing bust is — as expected — taking years; so is the much needed but painful deleveraging of the American consumer. And Fed action can’t replace a reasoned, bipartisan effort to avoid the fiscal cliff, reform the tax code and rebuild U.S. infrastructure to improve the nation’s financial standing and boost American competitiveness.

In Europe, we can make the argument that a bit more easing and inflation would do a region mired in recession and debt some good. But does anyone really believe the ECB can truly quell the crisis? ECB cash can’t replace real reform in the countries themselves, either to fix their shattered national finances or loosen shackles on growth. The euro zone has to restore the confidence of private capital in the monetary union through fundamental change such as a stronger fiscal union and a zonewide strategy to improve growth prospects. At best, any ECB action would provide a temporary bandage on the euro zone’s hemorrhaging. Even if the ECB bought more bonds, John Higgins at research firm Capital Economics explained in a July 27 analysis, “we doubt very much it marks a watershed in the crisis.”

(MORE: Why a Euro-Zone Crisis Can’t Be Avoided Very Much Longer)

The fiscal problems of Spain and Italy are likely to necessitate full-blown sovereign bail-outs. Not only is the required size of these operations far in excess of what the ECB would probably be prepared to commit to bond purchases, but the Bank itself remains ideologically opposed to monetary financing of sovereign debt … Meanwhile, the crisis in the euro-zone is as much about growth as it is about debt. Buying sovereign bonds does nothing to address the fundamental problem of a lack of competitiveness that plagues troubled euro-zone countries.

Let’s take this analysis a step further. When the ECB has stepped in over the past year, either to buy bonds to push down borrowing costs, or to ease a credit crunch in Europe’s banking sector, it created false hope that the euro crisis was being resolved. That’s because the ECB bought time for government officials that they then squandered. In other words, the ECB has helped the governments of the euro zone continue to dawdle in taking the kind of strong action that could really solve the crisis. Draghi has been something of a crutch, allowing the euro zone to limp along through the crisis without taking the painful medicine it needs to get well. No wonder Draghi, in a press conference last week, stated that the ECB would step in to help euro-zone governments only after they helped themselves:

The first thing is that governments have to go to the EFSF [the euro-zone bailout fund], because, as I said several times, the ECB cannot replace governments, or cannot replace the action that other institutions have to take on the fiscal side.

(MORE: How Barclays Rigged the Global Machine)

We can take a similar view of what’s happening with the financial sector. Despite all the support offered by the Fed, the Bank of England and other major central banks, many of the world’s financial institutions don’t seem to have really reformed themselves, to make their operations less risky or more sustainable. The interest-rate-fixing scandal at Barclays and the massive trading loss at JPMorgan show that a fair share of the world’s big bankers are still as willing to cheat and as unwilling to control risk as they were before the 2008 Lehman Brothers meltdown. That means the global financial sector is still an unreformed threat to the stability of the global economy. Why dole out even more?

The problem isn’t restricted to the developed world. In China, financial experts are calling on the central bank to lower interest rates and loosen money to prop up sagging growth. In doing so, however, they’re asking China’s central bankers to prop up an out-of-date economic model addicted to debt and easy money. By adding more cash for the system to burn, the central bank, if too aggressive, could push the country closer to a crisis. What China needs, just like the U.S. and Europe, is real reform to spur new areas of growth rather than injections of money that would stimulate the old ones only temporarily.

To their credit, Bernanke and Draghi have so far withstood the pressure to act. Good for them. It’s high time they keep the cash spigot closed and force the global economy to undergo the reform it so badly needs. Bankers may yell and scream. But like any spoiled child, or drug addict, they’ll survive, and be better for it.

MORE: 9 Reasons Why This Economy Feels So Bad

31 comments
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manapp99
manapp99

It all comes down to how you want your pain. Do you pull the band-aid off slow and prolong the pain or fast and get it over with. Either way it's coming off. 

Azalp Yerbua
Azalp Yerbua

Quantitative easing is like those nasal sprays for congestion. Works for a little while and then you're totally screwed.

ClawhammerJake
ClawhammerJake

How about (1) meaningful regulation of the financial community, and then (2) throw a bunch of the guys in jail for a long time.    My guess is that while the rest of the manipulators are busy figuring out how to stay on this side of the iron bars, America will start to recover.

Firozali A.Mulla
Firozali A.Mulla

In the UK there is huge problem on the Olympic issue. Is it London, UK , Great Britain and the athletes care less as their replies are crazy. Tell me at this times have they come to learn geography , history or to win win win the medals take these home put the ribbon round it and say " I won these in the Olympics" There is no name then if this was Ice Land , Fiji USA India or any. Read on please Economies have many faces. My friend in India talks of the two huge democracies from UK.”The hardcore nationalists among us might have their hackles rise on this one. Tuesday’s massive power grid collapse has triggered caustic comments from the international media. One such comment has come from the UK-based daily newspaper – The Guardian. Here is an extract from an analysis in the paper: “It is a paradox that in China unelected leaders are careful to provide the masses with material benefits such as electricity, water and roads because they legitimise dictatorship. Whereas in India, democracy allows just the opposite: free elections excuse the political class from providing the basics of life to the masses who have elected them.” No matter what our allegiance is to the nation, the argument is doubtless an interesting one. China has one of the world’s most powerful dictatorial regimes thriving on one-party rule, handling levers of stifling control. Dissidence of any kind – political, democratic, and artistic – is theoretically and practically outlawed by such regimes. This applies as much to the unarmed students' uprising in Tiananmen Square (brutally crushed by the army,) as it does to the Chinese government's response to artists like Ai Weiwei. But even such consummate state machinery cannot weed out protests altogether. Yes, it can manage them better. But it definitely cannot snuff them out. Hundreds of protests happen in China, challenging its policies of land acquisition, rising inequalities and lack of resources in the countryside. But the fear of punishment does work in keeping them less publicized. In sharp contrast, India is a messy democracy, where theoretically, the state recognizes the right to dissent. But how does its commitment really play out? There are ways of managing or controlling a democracy – which the Indian state seems to have leveraged well. Alarmingly, It is the very principle of electoral democracy (non-existent in China) that the ruling Congress and the political class as a whole, is using to dismiss out of hand protests and movements that go outside the party system. Take for example the on-going Anna Hazare struggle. Contest election or else does not talk too much – is what the Congress has to say to the protesters. By using the CBI to harass its opponents and even members of dissident civil society groups, and taking its own time to pass a crucial bill to protect whistleblowers, the government is making light of the very principle of democracy it swears by. At the heart of this India-China divide lie two political systems. One: a democracy which, neither provides its citizens with basic necessities, nor is true to the concept of honoring dissidence. The other: a one-party dictatorship, which does not make any pretence of being a democracy and is openly hyper-nationalist, even as it battles constant protests challenging the mighty state apparatus. So the next time someone says "at least India is politically democratic," perhaps we should wonder what meaning "democracy" has any more.” I have edited to remove don’t to does not and isn’t to is not. What is to give light must endure burning. -Viktor Frankl, author, neurologist and psychiatrist, Holocaust survivor (1905-1997) I thank you Firozali A.Mulla DBA.

Antiehypocrite
Antiehypocrite

Nah....

The Fed is buying 61% of US debt with printed money.  If they stop interest rates will go up to attract buyers.   

Work out the cost to carry 16 trillion dollars of debt at say 4%.

America is bankrupt - that is why the Fed will continue QE

Bilosopher
Bilosopher

It's sad that the government (all of them) do not view infrastructure re-building as critical to American prosperity. I strongly oppose more free money for the thug bankers to squander on their "bets".

Boxholder
Boxholder

Wrong. In 21st Century USA, the economy is not being held back by lack of infrastructure -  we have plenty of roads, wires, tracks, etc. to move goods and services. There is not business being lost because we can't get an item from Point A  to Point B efficiently. Infrastructure investment pays of in developing economies - like the US in 1850-1960, or China today where there are bottlenecks due to lack of roads to transport goods between many locations.

Infrastructure spending that is not required to remedy a lack of transport for goods and services is wasted spending that destroys capital. Greece is a great example of this. Since joining the EU they financed a huge infrastructure spending spree - they have high speed rail lines and superhighways that end at villages with only a few thousand people - and virtually no ridership. Greece has tremendous infrastructure, but no need for it and no real means to pay for its maintenance and operation - yet now they have a huge debt load to pay for its construction and huge budget buckets to pay for the people to operate high speed trains to nowhere that have no ridership.

In the USA in 2012, infrastructure spending will not produce economic growth as our existing infrastructure is not a limiting factor in our productivity, at least not a significant one if at all.

zrlx
zrlx

The ECB ,without any doubt,will put another slathering of easy money. If you analyse the European zone econmic,lot of people are out of work,especially the spain unemployment rate is as high as 25%.There are not other ways to stimulate the cliff ecomic environment.

Jay Beaulieu
Jay Beaulieu

Hogwash!!!!

Do you want a sustained recovery to start Monday morning, in just six words? All Bernanke has to say is "The Fed will buy PACE bonds."

www.pacenow.org.

This would jump start the economy, by putting an estimated 3 million construction workers back on the job, retro-fitting homes. Lower our trade deficit. And the Fed could even charge the homeowner\community only 3% interest and return the profit to the Treasury, to reduce the public debt and then burn the principal.

bcfred
bcfred

Jay, the health of the housing market is a symptom of the economy, not a driver.  Historically low mortgage rates haven't moved the needle at all because people are still not going to buy a house until their personal employment outlook stabilizes - no matter how cheap the loan might be.  As the restructuring programs show, people who can't afford to pay a mortgage under original terms are highly likely to default even if the mortgage is restructured.  Pumping borrowed money into the housing market to fix up houses will have no more long-term impact than the first time homebuyer's tax credit.  Remember that? 

Jay Beaulieu
Jay Beaulieu

Nope. You didn't follow the link and read. It is nothing like the first time buyers credit. Because it's paid for like a new school or sewer the accessment is on the property and paid like local taxes. Which removes the impediment of people having little equity, should turn a profit for the homeowner through decreased energy bills the first year, pays down the public debt, has zero risk of inflation, if a PV system is installed it increases the value of the home on average by $17,000, creates 10 permanent jobs per million invested and provides the financial tool to get paying customers back into the economy.  

The current holdup is the lien position and the FHFA. But Congress could fix it, the judge could rule against FHFA or the Fed could just buy the bonds.

Energy saver calculator:http://solar-estimate.org/inde...

DeborahSmythe
DeborahSmythe

Here is an article that looks at several aspects of the American economy both before and after  Mr. Bernanke took over as head of the Federal Reserve showing how ineffective monetary policy has been thus far, three years into the "recovery":

http://viableopposition.blogsp...

DevonP
DevonP

Your article is noble and dangerous. The US Federal Reserve has a duel madate of controlling inflation, which is well under control, and keeping unemployment low, which is out of control. The Fed should be doing everything in it's power to put Americans back to work, short of causing high inflation, of which there is no sign. The best answer is real financial reform and economic stimulation. Just because Congress is not up to the task of real reform why should millions of unemployed Americans suffer? Which is more important right now, high principal or Americans being able to

Archie Dunbar
Archie Dunbar

DevonP, who are you to say "no sign" of inflation with no caveat?  Of course there is inflation, the Fed even has a target for inflation.  The government merrily charges us capital gains on income that is often after 10 or 20 years nothing more than inflation.  Now if you wanted to say, no sign of "hyper inflation...

sixtymile
sixtymile

"duel mandate" -- inadvertent irony?

sixtymile
sixtymile

 Not true, the US Fed is just feeding the leveraged cash cycle of the bankers/investors/speculators. The Fed can only create money which creates the illusion of a working economy and does not create jobs. This can't end well; Super Mario seems to have sussed it out.

DevonP
DevonP

Your article is noble and dangerous. The US Federal Reserve has a duel mandate to control inflation and keep unemployment low. Inflation is in control but unemployment is out of control. The Fed should be doing everything in it's power to put Americans back to work, short of causing high inflation (which there is no sign of). The best answer is real financial reform coupled with economic stimulation. Just because Congress is not up to the task of solid reform why should millions of unemployed Americans suffer? Which is more important right now, high principal or Americans being able to put food on the table and a roof over their heads? There is time for reform but we need to put America back to work now.

DevonP
DevonP

Your article is noble and it is also dangerous. The US Federal Reserve has a duel mandate, to control inflation AND reduce unemployment. Inflation is well under control and unemployment is out of control. This has nothing to do with bankers but the millions of unemployed Americans. The Fed should be doing everything in it's power to put people back to work, short of causing high inflation (of which there is no sign). QE is not perfect and there is a moral hazard with bankers but economic stimulation coupled with real reform is the best path. Just because Congress is not up to real reform why should unemployed American families be punished? Which is more important right now, high principal or families being able to put food on the table and a roof over their heads?

Hoop Ojoop
Hoop Ojoop

 " short of causing high inflation (of which there is no sign)"

Thanks, I just blew coffee all over my monitor.

Seriously, do you get out of the White House much?

SnoopDog23
SnoopDog23

Hoop, look at virtually any of the inflation diagnostics and you'll quickly find there is no evidence of "high inflation" (e.g., the Cleveland Fed's expected inflation data over 1 or 10 years, the BEA's core PCE index, the BLS's data on labor costs).

The Fed's stated long-run inflation target of 2% is more or less consistent with the views of mainstream economists.   The concept of "high inflation" is obviously subjective, but how on earth can you construe this from the stated target of the Fed, the evidence on current inflation, or measures of where inflation will move to in the short and long term? 

Stable and moderate inflation pales in comparison as a  problem to that of our high unemployment rates and fiscal backwardness.  I am not optimistic that another round of QE will stimulate the economy.  Frankly, U.S. monetary policy has exhausted its traditional tools and is now left with few options to improve the economy. 

Nonetheless, having simpleton comments like yours adds nothing to what should be a serious discussion.

ttssyf
ttssyf

The only "diagnostic" I need to look at is the bill after I've bought groceries or household items.  And it has gone steadily up, along with gas prices.  One example?  Look at the price of razor blades.  You'd think they were made of some sort of semi-precious metal...and maybe they are, now.

Bill Meeker
Bill Meeker

QE puts cash in the hands of the bankers, many steps away from the under/unemployed.  We need job creation which the private investment world is unwilling (versus unable) to supply.  

Infrastructure investment would be a much shorter route to improving the economy.

Boxholder
Boxholder

Wrong.

In 21st Century USA, the economy is not being held back by lack of

infrastructure -  we have plenty of roads, wires, tracks, etc. to move

goods and services. There is not business being lost because we can't

get an item from Point A  to Point B efficiently. Infrastructure

investment pays of in developing economies - like the US in 1850-1960,

or China today where there are bottlenecks due to lack of roads to

transport goods between many locations.

Infrastructure spending that is not required to remedy a lack of

transport for goods and services is wasted spending that destroys

capital. Greece is a great example of this. Since joining the EU they

financed a huge infrastructure spending spree - they have high speed

rail lines and superhighways that end at villages with only a few

thousand people - and virtually no ridership. Greece has tremendous

infrastructure, but no need for it and no real means to pay for its

maintenance and operation - yet now they have a huge debt load to pay

for its construction and huge budget buckets to pay for the people to

operate high speed trains to nowhere that have no ridership.

In the USA in 2012, infrastructure spending will not produce economic

growth as our existing infrastructure is not a limiting factor in our

productivity, at least not a significant one if at all.

Our productivity is not being restricted by an inability to transport people or goods, it is being restricted by making private investment in risky but potentially highly rewarding ventures much less attractive, as when you are successful in a venture you will be penalized with high future taxes as Obama makes war on success (e.g., higher capital gains tax rates, higher dividend income rates). The reward part of the risk/reward equation has been reduced, so investment is unwilling to take on riskier ventures knowing the future reward (if successful) would be much less after taxes.

Jamie Wong
Jamie Wong

Completely agree. Monetary tricks (e.g. quantitative easing) will work only for a short while. Conitinued, injudicious and indiscriminate use of such policies will only lead to inflations. Worse still, some opportunists will exploit these policies for their own benefits. To cure the economy of its own problems we need to introduce fundamental, structural changes. Yet it's both painful and time-consuming to effect such structural changes and it makes sense to adopt some expansionary monetary policies (of an appropriate scale) in the transition period (in the short run, but not in the long run).

bcfred
bcfred

Further, they no longer really work in the short-term either; it's just an exercise in time shifting that we've been employing for a while now.  With no signs that the global economy will be growing robustly two years from now, these programs are beginning to create a long-term drag that will make recovery that much more difficult.  We've been operating at historically low interest rates for years now with no discernable benefit; turning long-term debt into short-term debt to lower rates thus cannot be expected to have any meaningful impact.  It's all a charade to hide the fact that governments have finally found the point at which they can no longer spend more than they take in, year after year forever.  Households and businesses had to adjust to this reality; the uncertainty caused by prolonging the day of reckoning for governments is only impeding the private economy's ability to recover.

Hailey
Hailey

" short of causing high inflation (of which there is no sign)"..by the way ,A chance to test and keep the latest Ipad and iphone , all that is required is a simple email submit so they can contact you , limited offer thou so hurry up : back-to-school-giveaway.blogsp...